Wal-Mart may see radio-frequency identification (RFID) tags attached to incoming cases and pallets as an ingenious solution to the problem of costly stockouts. But as the next group of suppliers ramps up to comply with the mega-retailer's 2006 RFID mandate, Wal-Mart may run up against an out-of-stock issue it can't control—a shortage of RFID tags.
Some analysts are warning that the industry can expect sporadic tag shortages during the first half of the year— possibly lasting into the third quarter—as tag manufacturers ramp up production for tags that meet the new second generation (Gen 2) standards that were ratified in late December. "We believe that demand will far outstrip capacity well into [2005]," says Larry Blue, vice president and general manager of Symbol Technology's RFID Tag Business Unit. "Those people who are not engaged right now [in an RFID pilot] may find it difficult to find tags, but that will change toward the middle to end of the year as more capacity comes on board."
Symbol, which purchased Rockville, Md.-based tag manufacturer Matrics for $230 million late last year, expects to produce 150 million tags in 2005—just enough to meet the needs of its current customers plus a couple of new ones. The company will continue to produce four million to five million tags per month in the first quarter, ramping up to 10 million to 12 million tags when its Gen 2 product becomes available.
In addition, Texas Instruments has confirmed plans to produce EPC Gen 2 tags. It expects to have working samples available in the second quarter and to begin volume production in the third quarter. Bill Allen, TI's director of marketing, says TI could be producing "tens of millions" of Gen 2 tags by year's end, "ultimately getting to hundreds of millions and then ramping to billions based on future demand." At the same time, Philips has accelerated its production of RFID tags as well.
The companies hardest hit by a shortage will likely be those that have come late to the game. Early last month Wal-Mart told DC VELOCITY that a handful of suppliers that ordered late have run into delays caused by the tags' 12- to 16-week lead times and that those suppliers will go live by the end of February.
Still, that will probably be a limited population. "There are certainly some [Wal-Mart] suppliers who … started too late [and] will have a hard time getting tags, but that is certainly not the majority of them," says Kara Romanow, research director at AMR Research.
"Depending on how quickly [Gen 2] rolls out, there may be a gap until TI or Philips really ramps up production. Once they enter the game, the entire landscape changes."
One change in the landscape could be a significant drop in price, especially if a company called OrganicID delivers on its business plan to produce organic printable tags. The venture-backed company recently entered into a partnership with International Paper to develop the first printable RFID tags from organic materials. Officials at OrganicID say the development could push down tag prices to 5 cents apiece or less.
You would hardly expect manufacturers still panting from their sprint to meet Jan. 1, 2005, RFID deadlines to show much enthusiasm for expanding their RFID use anytime soon. Yet electronics manufacturers and retailers eagerly await the day when all computers, DVD players and cell phones come tagged right down to their component parts.
It's not just that electronics suppliers can expect a relatively quick return on their RFID investment. They also see RFID as a formidable weapon in their battle to control returns. Tony Sciarrotta, director of returns management for consumer electronics manufacturer Philips, looks forward to the day when retailers routinely use RFID tags to electronically register each item sold. When that happens, says Sciarrotta, "we'll clearly be able to identify when and where specific products were purchased."
For retailers struggling against a tide of costly returns, that will be an enormous help. With information on exactly when products were bought, retailers will be better able to enforce time windows for returns, explains Dale Rogers, chairman of the Reverse Logistics Executive Council. And that's not the only return-related benefit, he says. "RFID will also make it much easier to track the cause of a return [and] to accumulate data about the return."
There's one population, however, that won't be overjoyed when the RFID revolution finally dawns. Scammers who buy new computers, switch out the new and faster parts with old parts, and return the new units with old parts are about to find out that for them, it's game over. Computer manufacturers have caught on. Within three to five years, they hope to be tagging not just their products but individual computer components, right down to the mother boards, DVD burners, and modems. Scammers, take note!
Gartner, Inc.